Business Law of Australia Butterworths

Questions: 1. What common law duty and statutory duty if any has Julian breached? 2. What common law or statutory duty have Sol and Daniel breached? 3. If the directors have breached their duties do any of them have a defence and if not what are the consequences for them? Answers: 1. The corporations law in Australia is prescribed some duties for the directors of companies. The sources of these duties are the common law and also the Corporations Act, 2001 (Cth). Some duties they also be imposed on the directors by the constitution of the corporation. These duties have been imposed on the directors for the purpose of ensuring good corporate governance and also to ensure that the directors give preference to the interests of the corporation. The facts of the present case reveal that there has been a breach of duties by Julian as the director of Property Developments Ltd. These duties include the duties prescribed by the common law and also the statutory duties that have been mentioned in the Corporations Act. The duty prescribed by common law that has been breached in the present case is the duty of the directors to it bona fide. This duty is also called the duty of the directors to act in good faith (Woodgate v Davis, 2002). In view of this duty, the directors have to act in good faith and give preference to the benefit of their corporation. The statutory duty that has been breached by Julian is the duty of good faith. Section 181 of the Corporations Act carries the duty of good faith. In view of this duty, it is required that when the directors are using their powers and fulfilling their duties, it is necessary that the directors take action in good faith and they ought to also act for a proper purpose (Statewide Tobacco v Morley, 1990). The obligation imposed by section 181 is consistent with the fiduciary duty of the directors according to which the directors have to act bona fide (Lipton, Herzberg and Welsh, 2016). This obligation will be violated by the directors if they're going to use their powers improperly even if they believe that they are acting honestly. Another breach of statutory duty in these cases the duty of the directors that has been talked about in section 182. It has been declared by this obligation that the directors should not use their position improperly. It can be said that the directors have us ed their position improperly if they are going to achieve an advantage for themselves or for some other person or if they're going to affect a loss to the business. Julian wanted that her uncle Gerald should receive a benefit from the land deal that he was going to enter the Property Developments Ltd. in the same way, Julian had not told the other directors of the company that the architectural contract was going to be given to her brother Raphael. 2. It can be said that the two directors of the company, Sol and Daniel were accountable for violating their common law duty of care and diligence. Similarly, the two directors of Property Developments Ltd. can also be held liable for violating their statutory duty to prevent insolvent trading. This duty is present in section 588G, Corporations Act. According to this duty, the directors should prevent the company from trading if they have reasonable grounds to suspect that the company may not be solvent. In the same way, according to the duty of care and diligence, it is necessary that they remain aware of the financial position of the company at all times (R v Byrnes, 1995). This requirement includes information regarding the financial state of their cooperation. This is a very important duty and is not reduced even if the directors claimed that they have delegated this responsibility to some other person. Hence, the ignorance of the directors regarding the financial position of the company cannot be used by them as an excuse especially when such ignorance has been created by themselves (Harris, Hargovan, Adams, 2015). As a result of this duty, the directors are under legal obligation to ask questions related with the information that has been given to them by the employees of the company. By asking such questions, the directors can be assured that this information really signifies the situation of the business. Therefore the directors must not simply believe the information that has been given to them in the board meetings. 3. The common law business judgment rule has provided a defense to the directors. This rule has also been included in the Corporations Act and is mentioned in section 180(2). However there are certain requirements that have been fulfilled so that the directors and away the best provided by the business judgment rule. First of all, it is obligatory that the judgment is made in good faith (Vermeesch and Lindgren, 2005). The judgment is also required to be made for proper purpose and no personal interest of the directors should be present in the subject matter of such a decision. The rule also requires that they have gathered proper information regarding the issues related with the judgment and they should rationally consider that their decision is in the best interests of the company. However in this case, it cannot be said that these requirements have been fulfilled. The result is that the defense of business judgment rule cannot be used by the directors of Property Development Ltd. When the directors are held liable for breach of their duties, the consequences include civil as well as criminal penalties. The criminal penalties prescribed for the directors consist of a fine up to $200,000 and imprisonment that may go up to five years if it is found that the directors have breached the provisions of section 184 or violated section 588G. Among the civil penalties for the directors in such a case include a penalty for sum up to $200,000. References Harris, J. Hargovan, A. Adams, M. 2015, Australian Corporate Law LexisNexis Butterworths 5th edition Lipton P, Herzberg A and Welsh, M, 2016, Understanding Company Law, 18th edition, Thomson Reuters Vermeesch, R B, Lindgren, K E, 2005, Business Law of Australia Butterworths, 11th Edition Case Law R v Byrnes (1995) 130 ALR 529 Statewide Tobacco Services Ltd v Morley (1990) 2 ACSR 405 Woodgate v Davis (2002) 55 NSWLR 222 Business Law of Australia Butterworths Questions: 1. Advise Richard and his sons regarding the steps that need to be taken to incorporate and register a company? 2. The issue arises if Terry can sue Cosmo Mine Ltd (CM) which is the parent company of its employer? Answers: 1. In view of the facts of this case, it can be said that certain benefits will be available to Richard and his sons David and Liam if they decide to incorporate a company for expanding their business. As compared to the business section of a sole trader or a partnership, it is easier to expand the business in case of the business structure of a company. Although the costs associated with the registration of a company had hired as compared to running the business as a sole trader or apartment but in the long term, these costs can be treated as a part of business expenditure. At the same time, the mere registration of the name of the business is cheaper as compared to the registration of a company. However, after a company has been registered, there is no need to register the name as a business name (Sweeney, OReilly and Coleman, 2013). The reason is that in case of a company, the full name of the company, that ends with "Pty Ltd" is used by the business. In case of the ongoing costs, the business name registration has to be renewed periodically and a fee is charged by the government for this purpose. On the other hand, a registered company has to annual review fee to the ASIC. The major advantage that is present in case of the registration of a company is that of limited liability. In case of a company, the liability of the shareholders of the company is limited to the shares owned by them. On the other hand, sole traders and partners are fully liable towards the debts obligations of their business (Lipton, Herzberg and Welsh, 2016). Another significant benefit that is available in case of a company is related with tax. While individuals who are running their business under a registered business name only have to pay tax at the normal marginal rate, the companies in Australia have to pay tax at a flat rate that is less than the rate of tax charged from the individuals. The law also allows that a company can own property in its own name and similarly it can also enter contracts in its own name. In the eyes of law, after its registration, a company has its own legal identity (Graw, 2011). Therefore a company is treated as a separate entity that is distinct from its owners and directors. Before starting with the steps that are necessary for the registration of a company, it needs to be decided if the business structure of the company is most appropriate for the parties. In this case also, Richard and his sons have to decide if the business section of a company will suit their needs or if they should look for some other business structure. This decision has to be made, keeping in view the circumstances of the parties. For example in the present case, Richard's business is flourishing and his sons are also going to join the business. They want that the family business should be expanded and for this purpose, they want to select the appropriate form of business. Therefore, in this case the most suitable form of business will be the one that makes it easier to raise funds that will be needed for the expansion of the business. Another issue is that while Richard wants to name the company Ridali, his sons wants to name the business, "Rich's Guaranteed Olives". In this regard, it is worth mentioning that the registration of a company is different from merely registering a business name. White selecting the name of the company, there are certain issues that need to be considered. For example the name of the company cannot be identical with an existing name (Pentony et al., 2009). The parties can only use the name that is not identical with the name of an existing company or business name. Therefore it is a good idea to make name availability search for the purpose of seeing if the name that the parties not to give to their business, is available or not. However the law provides that if the parties have an identical name, such a name may be registered by them as the name of their company in some cases. It is also provided that their certain words that may mislead the people regarding the activities of the comp any and these words cannot be used, for example the associations with the government of Australia, Royal family or any organization of ex-servicemen. The name of the company should also show the liability of the members of the company and status in the name. For instance, if the liability of the members of the company is limited to any unpaid amount on the shares owned by them, in the name of the company is required to end with proprietary Limited. On the other hand if the liability of the members of the company is unlimited, the name of the company should end with Proprietary. On the other hand, if you want to display a different name, the option available is register such a name as a business name. Hence in the present case, Rich's Guaranteed Olives can register the business name as Ridali. The effect will be that the business can trade as Ridali and this name can be displayed on all signage. 2. The general rule that has been provided by the companies is known as the doctrine of separate legal identity of the companies. Salomon v Salomon (1896) was the case in which the court had presented this rule for the first time. While deciding the issue in this case, it was mentioned by the court that a corporation enjoys a separate personality in the eyes of law. In this way, according to the doctrine of separate identity, the law considers a corporation as having its own legal identity. Therefore the corporation enjoys the status of a distinct legal entity (Vermeesch and Lindgren, 2005). The result is that under the law, the company has been allowed to own property in its own name. Likewise, the liabilities of the company are also treated as its own liabilities. In view of the distinct legal identity of a corporation, the law allows a company to sue and be sued under its own name. Along with the doctrine of separate legal entity, there was the rise of the doctrine of limited liab ility of the companies. Consequently, the law treats a corporation as having its own distinct legal identity and in the same way, it is considered that a corporation has its own identity that is separate from the shareholders of the company. The result is the liability of the shareholders is restricted to the extent of the shares held by them in the company. Regarding the debts and liabilities of the company, the law provides that these obligations can only be enforced against the company. However, significant exception is present to the norm of separate legal identity. This exception is known as the doctrine of lifting the corporate veil. There have been certain cases when the court was of the opinion that it needs to move ahead of the norm of the distinct identity of the corporations. Hence, the court may decide to lift the corporate veil for the purpose of imposing liability on the persons who have ultimate control over the corporation. A similar requirement has also been described by the tort law according to which, in case of negligence, there is a need of the presence of a relationship of proximity between the parties. Similar case also exists with the norm of piercing the corporate veil. An example in this regard can be given of the case titled Barrow v CSR Ltd (1988) there is a need to hold the patent company responsible for the tort which were committed by the employees of its subsidiary company and as a result of which, another employee of the subsidiary comp any has contracted asbestosis. While deciding the case, the court arrived at the conclusion that it was not significant if the case can be described by using the principles of agency law or if the case is described by explaining the proximity that exists between the employees of the parent company and its subsidiary or if it is described in terms of control or even the help of the notion of lifting the corporate veil and in all these cases, the same ultimate result will be present. At the same time, they were the cases like Briggs v James Hardie Co Pty Ltd (1989). In this case, the issue that had to be decided by the court was only concerned with negligence. Therefore the court faced the problem for joining the doctrine of corporate veil with the principle of foreseeability and the general nexus mentioned under the tort law. In view of the decided cases, it can be said that the legal position in this case is that when the subsidiary company lacks the resources to compensate the party under the tort law, such party has an option to claim compensation from the persons who ultimately control the Corporation. In view of this legal position, in the present case also, Terry can claim compensation from CM or from Lazarus Pty Ltd. The reason is that the shareholders of CMS had unanimously decided to wind up the company and as a result, the only option available to Terry is to claim compensation from the newly formed company, Lazarus Pty Ltd or from the parent company, CM. In this case it is clear that Lazarus Pty Ltd has been formed by the shareholders of CMS for the purpose of evading the liability towards the residents of Gunbarrel and the former employees of the company who had contracted cancer as a result of drinking contaminated water. CMS does not have the resources to pay compensation to these persons. On the other hand, CM owns 120 out of the 200 issue shares of Cosmo Mining Services Pty Ltd. At the same time, Cosmo Mine Ltd had complete control over the operations of CMS. CM leased the mining equipment and then the equipment was subleased to CMS and the subsidiary company was required to pay a leasing charge to CM that was equal to the bank's leasing cost along with 10 percent extra amount. References Harris, J. Hargovan, A. Adams, M. 2015, Australian Corporate Law LexisNexis Butterworths 5th edition, Lipton P, Herzberg A and Welsh, M, 2016, Understanding Company Law, 18th edition, Thomson Reuters Pentony, Graw, Lennard Parker, 2009, Understanding Business Law 3rd ed Butterworths Stephen Graw, 2011, An Introduction to the Law of Contract, 7th Ed., Thomson Reuters. Sweeney, OReilly Coleman, 2013, Law in Commerce, 5th Ed., LexisNexis. Vermeesch, R B, Lindgren, K E, 2005, Business Law of Australia Butterworths, 11th Edition Case Law Barrow v CSR Ltd (1988) Unreported Briggs v James Hardie Co Pty Ltd (1989) 16 NSWLR 549 Salomon v A Salomon Co Ltd [1896] UKHL 1